December 31, 1997
Jonathan Katz
Secretary
United States Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549
RE: File No. S7-25-97
This is the comment on proposed Amendments to Rules on Shareholder
Proposals by the American Federation of Labor - Congress of Industrial
Organizations, whose member unions represent 14 million working Americans and
their families. Our unions' members are beneficiaries of over $1.7 trillion in
public and multi-employer pension fund assets, as well as participating in
ESOP's, 401-k plans, mutual funds and single employer pension funds. In recent
years, multi-employer funds affiliated with AFL-CIO member unions have become a
major force in the corporate governance movement, sponsoring numerous
shareholder resolutions that have received majority votes.
I. SUMMARY
The proposed rule as issued by the Commission includes several radically
anti- shareholder features, while presenting two important advancements for
shareholders: the repeal of Cracker Barrel and the adoption of an "override"
mechanism to advance proposals that would otherwise be excluded under sections
(c)(5) and (c)(7). Taken as a whole, the proposed rule would create substantial
and in many ways prohibitive obstacles to shareholders bringing proposals. It
would foster costly litigation in place of cost-effective and time-proven
regulatory mechanisms. These changes are contrary to the expressed views of
Congress in the National Securities Markets Improvement Act of 1996, encouraging
the Securities and Exchange Commission to investigate enhancing shareholders'
ability to submit resolutions "relating to corporate practices and social
issues."
The Commission's proposal attracted unprecedented criticism. We have
attached a copy of an open letter from over 300 organizations to Chairman
Levitt. In addition, over 30 public pension funds have written to the
Commission criticizing the Release, including the California Public Employee
Retirement System.
Professor Harvey J. Goldschmid of Columbia University's School of Law and
Ira Millstein, Senior Partner of Weil, Gotshal & Manges LLP, have suggested
significant revisions to the proposal. In their letter, they suggest the
Commission should retreat to a minimal proposal essentially repealing Cracker
Barrel (Oct. 13, 1992) and adopting several technical changes. While such a
rule would be an improvement on the proposed rule, it would also represent a
lost opportunity to truly improve shareholder access. In particular, the
proposed override embodied the vital principal that shareholders should
determine what issues are worthy of a shareholder vote. A final rule that does
not include an override provision would not be consistent with the stated
mission and direction of increasing shareholder access to the proxy.
Additionally, while we commend Professor Goldschmid and Millstein for their
efforts, we are concerned that some of their recommendations, particularly with
respect to Rule 14(a)(4) and Rule 14(c)7, are not fully elaborated. Below we
discuss what we believe to be the substance of their recommendations in those
areas.
Our comment will first address the background to the Release, then discuss
the specifics of the Proposed Release, and finally address the suggestions made
by Professor Goldschmid and Mr. Millstein.
II. Background to the Release
Rule 14a-8, issued under the Securities Exchange Act of 1934, provides
shareholders with access to management's proxy materials to propose resolutions
to be voted on in corporate annual meetings. It was designed to allow
shareholders to be able to communicate with each other and thereby influence
corporate policy without incurring huge expenses. Rule 14a-8 was the vehicle by
which shareholders expressed concern over U.S. investments in South Africa
during the apartheid era, as well as corporate environmental policies after
Bhopal and the Exxon Valdez disasters. In recent years, workers and employee
pension funds have used the Rule 14a-8 process to propose and pass numerous
resolutions addressing corporate governance issues, from excessive executive pay
to management entrenchment devices that frustrate shareholders' voting rights.
A. Cracker Barrel: the Attack on Workplace Issues
In 1992, the SEC's staff issued a no-action letter to the New York City
Employees Retirement System in the Cracker Barrel case, indicating that the
Commission would henceforth treat all employment related issues as ordinary
business, and in particular that it was going to treat employment discrimination
issues as ordinary business. No-Action Letter Dated October 13, 1992. This
position was contrary to prior SEC practice and prior judicial opinions. In
1993, the Amalgamated Clothing and Textile Workers Union successfully brought
suit in the Southern District of New York to force Wal-Mart to include a
proposal related to equal employment opportunity in its proxy. ACTWU v.
Wal-Mart Stores, 821 F. Supp. 877 (S.D.N.Y., 1993). Despite this ruling, the
SEC has continued to follow its policy in Cracker Barrel.
B. The Congressional Mandate to Facilitate Shareholder Access to the Proxy
In response to shareholder concern and events such as the Texaco racial
discrimination case, pressure has mounted on the SEC staff to reverse Cracker
Barrel. Departing SEC Commissioner Wallman has publicly stated he favors
reversing it. In 1996, the Congress passed the National Securities Markets
Improvement Act, which included a requirement that the SEC study "(A) whether
shareholder access to proxy statements pursuant to Section 14 of the Securities
Exchange Act of 1934 has been impaired by recent statutory, judicial or
regulatory changes; and (B) the ability of shareholders to have proposals
relating to corporate practices and social issues included as part of proxy
statements."
III. The Proposed Rulemaking: an Attack on the Shareholder Proposal System
The proposed rulemaking strikes at several core principles of our
securities law system, including the principle of regulatory oversight itself
and the principle that shareholders should be given equal opportunity to vote
for or against those items that are known to be on an annual meetings' agenda.
A. Section (c)(4): the "Personal Grievance" Exception
Corporations have often sought to exclude proposals of general interest to
shareholders from the proxy on the grounds that they are motivated by a personal
grievance on the part of the proponent. Every shareholder is potentially open
to this accusation, including public and multi- employer pension funds and
religious investors. Corporations have been restrained in the past by the SEC
taking the view that a proposal will generally only be excluded if the personal
grievance is evident within the four corners of the proposal and its supporting
statement itself. In this rulemaking, the SEC proposes to no longer review the
omission of proposals under (c)(4). Proponents would be forced to sue in
federal court to require companies to include their proposals, a process that
for many institutional investors and most shareholders is prohibitively
expensive and time-consuming and involves exposure to the discovery process.
The only other protection proponents would have would be corporation lawyers'
enforcingg the four-corners rule. There is every reason to believe that those
companies where active shareholder oversight is most necessary are also those
companies which would, in the absence of SEC oversight, routinely omit all
proposals on the grounds that the proponents' motives were "personal." For
evidence of this, the Commission should review the American Trucking
Association's Rulemaking Petition dated October 13, 1995. As a result, the
substantive effect of this proposal would be to cripple the current shareholder
proposal system.
As serious as this proposal's substantive effect would be, its effect as a
precedent is even more disturbing. The Commission seeks to withdraw from its
oversight role in an area of Commission expertise in favor of a combination of
company self-regulation and reliance on the courts. This posture is contrary to
the Commission's purposes and the express will of Congress. It will burden the
Federal courts with cases the Commission is better suited to handle. Finally,
it frustrates Congress' purpose in passing the Securities Exchange Act, as
reaffirmed in the 1996 Act, which was to give shareholders cost-effective access
to the proxy.
B. Section (c)(5): The Relevance Exception
The Commission proposes to adopt a firm numerical measure of relevance.
The issue must involve at least $10 million in sales or costs, or 3% of total
sales or costs, whichever is lesser. In the past, the Commission has looked at
this question on a case-by-case basis. As Commissioner Wallman points out in
his Concurrence, this is the wrong quantitative measure, because activities that
involve small aspects of a given company can give rise to very large liabilities
or can involve social issues that are of broad interest to shareholders.
C. (c)(7): "Ordinary Business"-- the Cracker Barrel Repeal
The Commission proposes in this area to replace the Cracker Barrel bright
line rule allowing companies to exclude all employment-related proposals,
regardless of whether they raised "significant social policy issues." In its
place the Commission will look at proposals on a case-by-case basis. However,
the comments by the Commission in the release suggest that the Commission is
committed to a very narrow definition of what constitutes a "significant social
policy issue." The Commission indicated it would not automatically include
proposals dealing specifically with company operations in Maquiladoras or
workplace practices resolutions, both areas that have historically been of
concern to religious and pension fund shareholders. This approach to Cracker
Barrel repeal will have a modest impact on shareholders' overall ability to
raise social issues.
D. The Shareholder Override
The Commission proposes that proposals which obtain the support of 3% of a
company's shares may override the relevance and ordinary business exclusions.
This would be an important positive change in the governance process. Recent
crises in large-cap public companies such as Archer-Daniels-Midland and
Columbia/HCA have shown the need for a mechanism for shareholders to express
their concerns to the board on issues that the Commission may have in the past
characterized as ordinary business. The override would address this need, and
provide a vehicle other than a board contest for shareholders to act in a
crisis. Ultimately, it is an expression of shareholder democracy that should be
welcome to all participants in the corporate governance process.
The 3% threshold is too high, particularly in the initial year of an
override. In most large cap companies, assembling 3% requires recruiting
numerous institutional holders. Additionally, it will take time for
institutional investors to evaluate this mechanism and develop policies. We
would recommend a phased-in threshold for the override, starting in its first
year at 1%.
In response to the Commission's concern about the mechanics of an override,
we would recommend looking to the Delaware consent process as a model for
defining the record date. Additionally, we do not believe the safe harbor for
the communications involved in soliciting participation in an override creates
significant problems for the proxy system as a whole.
We should note that, while this override is a step forward in itself, it
does not as proposed affect either Rule 14a-8(c)(4), the personal grievance
exception, or the resubmission threshold requirement discussed below, and
consequently, is of limited utility if coupled with those proposed changes.
E. (c)(12): Resubmission Thresholds
The Commission proposes that the vote totals a proposal must receive for
that proposal to be resubmitted the following year be moved from 3% in the first
year, 6% in the second, and 10% on the third, to 6% in the first, 15% in the
second, and 30% in the third year. The history of shareholder activism shows
that on corporate governance issues, it takes years before even the most popular
proposals, e.g. de-staggering boards, reaches the levels the Commission is
proposing, and many corporate governance proposals that are broadly supported
within the business community do not achieve the proposed thresholds. Most of
the proposals on social issues that have come to loom large in corporate
boardrooms issues such as investments in apartheid, company conduct in Northern
Ireland, environmental practices, and employment discrimination, for years
received vote totals well below the proposed new thresholds.
These new thresholds, like the Commission's withdrawal from oversight in
(c)(4), are a substantial obstacle to shareholders wishing to engage their
fellow shareholders and their corporations' management in a serious dialogue on
corporate policy. While some adjustment to the current thresholds may be
warranted, like the other aspects of the Release discussed above, the proposed
new thresholds are contrary to the expressed wishes of Congress in the 1996 Act
in that they place formidable obstacles in the path of shareholders seeking to
effectively raise corporate policy and social issues in shareholder proposals.
F. Rule 14(a)(4): Discretionary Voting by Management
Rule 14(a)(4) governs the requirements more generally for the form of
proxy. It now limits the proxy holders' exercise of discretionary authority to
matters not known to be on the agenda at the time the proxy was solicited, to
proposals omitted from the proxy statement under the exceptions to Rule 14a-8,
and to certain routine matters. The Commission would amend it to allow
management to solicit discretionary voting on proposals known to management at
the time of the solicitation, providing the content of the proposal was
disclosed, and providing management included a box the shareholder could check
on the proxy denying discretionary authority as to that proposal.
The impact of the change is that management would not have to allow the
shareholders the opportunity to vote for the proposal on management's proxy
card. On the other hand, any shareholder making an independent solicitation has
to give shareholders the opportunity to vote either yes or no on each of
management's agenda items known to the shareholder conducting the proxy
solicitation. It was just this type of one-sided, management-dominated proxy
process that led to the Securities Exchange Act and the adoption of Rule 14.
For the Commission to initiate returning to such a process is an abandonment of
the Commission's mission under the Securities Exchange Act of 1934.
According to data obtained by our affiliate UNITE, the 14(a)(4) process has
been used approximately 300 times in the last ten years. A plurality of these
uses has involved a combination of shareholder proposals with a board slate. The
Commission's proposal would not allow in that context a shareholder to vote for
the shareholder proposals and against the insurgent slate. This is increasingly
a popular stance for institutional investors that are critical of incumbent
management but not so much as to favor replacing them with the insurgents.
We believe it is important to replace the uncertainty of the current
"reasonable notice" standard with a definite timetable. However, it is vital
that having been given proper notice of a majority solicitation, management
should only be able to vote on the proposal using proxy cards that gave
shareholders the opportunity to direct management's vote on that issue.
G. Other Proposed Modifications: Commission withdrawal from reviewing company
proxy materials, increasing dollar threshold, decreasing time for shareholders
to respond to defects in filing materials
The Commission intends to no longer review for accuracy the statements
placed by company management in proxies opposing shareholder initiatives. Like
the Commission's retreat on (c)(4), this is an abdication of the Commission's
regulatory role, one which will force proponents to always bear the costs of
litigation when faced with a false or misleading management statement.
The Commission intends to raise the threshold dollar value needed to be
able to submit a shareholder proposal from $1,000 to $2,000. While not
affecting institutional investors, this increase will exclude smaller investors,
including some of the increasing number of working Americans investing in
stocks. It certainly will not increase the accessibility of the shareholder
proposal process.
Similarly, shortening the time shareholder proponents have to remedy a
deficiency in their proposal identified by the company from 21 days to 14 days,
increases the difficulties faced by shareholders in filing proposals.
IV. The Goldschmid-Millstein Letter
The Goldschmid-Millstein letter recommends the Commission not enact the
most dangerous aspects of its proposal, including the changes to (c)4 and the
threshold increases. In three areas, however, we have concerns regarding the
content of their proposal: the override, (c)7, and 14(a)(4).
A. The Override
Goldschmid and Millstein recommend that the shareholder override be dropped
from the final rule. They do so without explanation. The override is a
proposal that would address Congress' concern about facilitating access in a
manner certain to filter out frivolous proposals. If the Commission does not
include the override in a final rule, it establish a process for examining the
idea free of the contention that the Commission's other proposals have brought
to this rulemaking process.
B. Rule 14(a)(4)
Professor Goldschmid and Mr. Millstein recommend adhering to the Idaho
Power rule with definite timetables and a requirement that a proponent certify
their intention to solicit the proportion of shareholders necessary to pass the
proposal. Their language is somewhat unclear as to what happens if a proponent
complies with the timetable and affidavit process, and then management does not
place the proposal on the proxy card.
Our understanding of their proposal is that once the proponent carries out
the solicitation, management cannot use the proxy cards from that first mailing
to vote on the shareholders' proposal. Only cards returned from a second
solicitation, cards giving shareholders' the opportunity to direct management's
vote on the proposal, could be validly voted on the shareholders' proposal.
This is an area in which the final rule needs to be very detailed and
precise, otherwise the Commission's goals of removing uncertainty and avoiding
litigation will not be achieved.
C. Rule 14(c)(7)
In discussing the repeal of Cracker Barrel, Professor Goldschmid and Mr.
Millstein are somewhat elliptical in their treatment of the ultimate fate of
Capital Cities/ABC (April 4, 1991), which introduced the concept of "excessive
detail." While we are in agreement that there is some level of detail in a
proposal that would be excessive, Cracker Barrel repeal is only meaningful if it
includes a clear repudiation of the factual findings in Capital Cities/ABC.
V. CONCLUSION
The Commission sought comment on the Release as a whole. Our view is that
it is, as a whole, a serious setback to shareholder rights. However, we believe
it does contain some positive ideas, and that the rulemaking process itself
offers an opportunity for the Commission to forward the goals articulated in the
1996 National Securities Markets Improvement Act. In drafting the final rule,
we hope the Commission will keep in mind that it is "the investor's advocate."
Sincerely,
William B. Patterson
Director, Office of Investment